The committee recommends that the government not enter
into a contract for the future submarine project without conducting a
competitive tender for the future submarines, including a funded project definition
The tender should invite at least two bidders, preferably
up to four, to participate.
The tender for the future submarine project should be
conducted in line with the committee's recommendations and the guidelines set
out in the Defence Policy Procurement Manual.
A request for tender should invite the bidders to provide
the Commonwealth with:
a Project Definition Study and preliminary design that meets
Top Level Requirements; and
a pricing arrangement to build a certain number of submarines and provide ten vessel years
of integrated logistics support, post commissioning.
In this chapter, the committee looks at the arguments for and against a
competitive tender and at the schedule for the process and considers whether
there is sufficient time to conduct a competitive process.
Without doubt, the choice of the designer and builder for Australia's
future submarines is a critically important decision. Not only is the future
submarine an expensive acquisition but the fleet of highly-capable modern
submarines is a vital part of Australia's Defence force. The safety and
well-being of its crew is also paramount. In this context, Commander Frank Owen
(Rtd) highlighted the importance of Defence making an informed and timely
decision. He stated:
We need a national
program that delivers a sustainable and affordable capability for the long term
and not just a quick-fix replacement of the Collins-class submarines. Indeed,
there are no quick fixes, just as there are no MOTS options. Even the most
capable of available overseas submarines will require modification. They will
rely on Australian industrial capability.
Rear Admiral Peter Briggs (Rtd) and Commodore Terence Roach (Rtd) also
placed a heavy emphasis on the need for 'careful and measured consideration of
Likewise, Professor Goran Roos noted the importance of the decision to acquire
Australia's future submarines. He acknowledged that submarine systems were one
of the most important advanced complex defence systems the ADF operates and recognised
the vital role they play in protecting Australia's trade routes. Rear Admiral Briggs
...we do need to make
the right decision and we do need to start with the right process to allow us
to make the right decision.
Speculation regarding limited tender
A number of witnesses thought that the government was not on course
to deliver the best submarine. During the inquiry, they expressed concern that
the government may be intending, as it did with the new supply ships, to
a limited tender.
For example, the Hon Martin Hamilton-Smith was of the view that the federal
government appeared to 'have softened up' the Australian public by criticising
Australia's current naval shipbuilding projects, including the AWD and Collins,
in order to push through an off-shore build of supply ships and possibly future
Mr Malcolm Jackman, Defence SA, harboured the same apprehension. As far
as he was aware, DMO was not following the normal procedure for large-scale
acquisitions, which was to run a 'comparative and competitive' project definition
study process. He told the committee:
In terms of reading
the tea leaves, so to speak, we are seeing a process that does not appear to
conform to what we would expect out of DMO.
Likewise, Mr Chris Burns, Defence Teaming Centre, indicated that there
appeared to be a strong push towards the Japanese submarine. He observed:
Prior to the
election, we were extremely confident, for instance, that the submarines were
going to be built in South Australia. It is undeniable that, since that time,
there seems to be a walking-away from the commitment to building those
submarines in South Australia.
Witness after witness gave emphatic and overwhelming evidence in support
of Defence conducting a competitive process.
The Hon Martin Hamilton-Smith stated that his government would like to
see due process that would involve an open project definition study (PDS), 'an
open process, where all the contenders put their offers on the table'. He argued that
a fair and open tender was the way to achieve the best outcome for Australia. In his words:
It just beggars
belief that you would go with one provider without testing the market.
Mr Jackman stated that anybody that has deep knowledge of Defence
acquisition would say that a competitive comparative PDS was clearly the
to go through.
Mr Burns similarly argued that a competitive tender was the only way to
validate claims made by industry contractors. He explained that you cannot test
how much a project is going to cost, including whole-of-life cost benefits,
until you go to
a fully open and transparent tendering process. In his view:
When I say 'open and
transparent tendering processes', I specifically exclude the sole source and
limited tenders being suggested for the future submarines or the farcical
situation of Australian industry being specifically excluded from tendering for
the replacement of replenishment ships. You will never know the true potential
cost of a project until you get multiple companies to put their names to dollar
figures on firm tender bids.
He underlined the fact that it was not just a question of price but 'the
capacity to actually do the job'.
Mr Brice Pacey also favoured a competitive tender, suggesting that deep
consultation with other players would be worthwhile.
In 2012, Mr Pacey recommended that the next generation submarine should be an
evolution of the Collins design. Since then, however, he has formed the view
that if there were new options, they should be considered. He thought that the
best way to do that would be through a competitive tender process of some sort,
which would be 'entirely consistent with this government's philosophy'. He explained
that he had been working in the private sector a long time and thought that
potential suppliers need to be put under pressure in order to come up with the
I think that any
alternative, any new opportunity, should be put under the same sort of scrutiny
the Collins was in the original competitive process. The exact form of that competition
is open for negotiation.
In essence, Mr Pacey agreed with the view that an open, transparent
tender process with competitive tension would be good for both the design and
the taxpayer and would be the only way to proceed.
Dr John White, who participated in the 2014 independent review of the
performance of the AWD program, explained the need for funded, competitive PDS
to properly and rigorously form up the future submarine project. In his view,
it was appropriate to explore all options—Japanese, Korean, German or Spanish
He insisted that there was a definite need to have an open process where claims
are stress tested and certainty obtained about Australia achieving value for
money and maximising the strategic, employment or industrial benefits for the
Dr White repeated his contention that the various claims of the
contractors who can build submarines suitable for Australian conditions can be
best tested by
a competitive tender process. He suggested that the claims 'need to be put
under some tension, some pressure'. Furthermore, that it was not only the
company, the designer, which should be scrutinised but also 'the industry base
of that country, the support of the military and the government of that
nation'. Put succinctly, he stated:
Unless there is a prize at
the end and some competitive tension, the experience is that you really do not
get the best offer.
Drawing on the Collins class experience, he explained that under
competitive pressure from other countries, the German bidders agreed to comply
'with the Australian requirement for a fixed price bid to build all submarines
He informed the committee:
I can absolutely
assure you that, if there had not been a competitive PDS with that as a subject
of the competition, that bid for building in Australia would not have been
forthcoming. It is every country's preference to keep the work at home. But in
1986 the Germans were able to offer a fixed price.
He argued that a competitive tender would be in the government's
to ensure and demonstrate that the best value for money was obtained in the
future submarine project.
He warned against a sole-source supplier, saying further:
There are significant
technical, commercial and capability gap risks invoked by prematurely and
unilaterally committing to a preferred overseas, sole-source supplier.
Well-established best procurement practice in Australia and many parts of the
western world is to undertake a competitive project definition studies, or PDS,
process involving the potential suppliers—including or in parallel to the
preferred solution, if you have one. This should be done with a view to having
a viable fallback option to proceed with should, for whatever reason, the
preferred solution prove not to be executable. I understand that this has
sometimes been done in parallel when a US foreign military sale, or FMS, is the
preferred solution in this country. So this is not new territory.
According to Dr White, choosing a sole-source supplier could lead to a
capability gap for Australia's submarines. Referring to the Japanese option, he
said that even if Japan were the preferred design solution, the government needs
'to develop one or two, preferably two, fallback options in parallel because we
do not know for what reason the preferred option, if it is Japan's, may not be
able to be brought to a contract'.
In this regard, he noted that Japan still had not approved the export of
products such as the submarine. In his view, there was 'some risk in those
processes going through their procedures in Japan'. He accepted that he was no
expert in Japan's foreign policy, but would have thought that that process
could be a year or two years.
He explained further:
If the Japanese
design solution were the sole option, failure for whatever reason to achieve an
acceptable contract over the next year or two—because that is how long it will
take to define it—with no fully developed fallback would create significant
project risk and lead to a gap, almost definitely, in Australian submarine
That would be lost
time. Overall this could lead to embarrassment for the respective governments
and militaries. A separate PDS is therefore, I argue, required for each
shortlisted submarine platform design option. This would be not only to
finalise the existing design and details for the construction, build,
specification, standards and testing regime required to validate the design but
also to develop, in conjunction with the RAN the interface requirements for
directed design changes, of which there will be many, including combat system
control—because we are putting a US combat system in—weapons discharge,
external communications, security equipment and of course Australian Navy
habitability changes. Separately, those critical and sensor subsystems that may
be purchased from third parties—which will definitely be the case—need to be
agreed, to consider design options and their required interfaces.
As noted earlier, Dr White made the point forcefully that Australia
could not afford to go down the path with only one potential supplier; 'you
need to take two or three down the path so that at all times you have
competition and you have a fall-back'.
Professor Roos agreed with the proposition that Australia should conduct
an open tender. He recognised that competitive tension between contending
builders was necessary to ensure there would be the appropriate and effective
transfer of technology and a substantial Australian industry participation
plan. He argued that such fundamental requirements must 'be built into the
procurement process if you want to accomplish the defence objectives of
self-reliance for an island continent, and achieve the optimal balance between
value for money and sovereign capability'.
He explained further that Defence would require a new class of
no matter what direction was chosen because none of the existing classes in the
world would meet Australia's requirements. He argued that in order to make an
evaluation of the preferred submarine class, a contested project definition
study was required. According to Professor Roos, this approach would be the
normal way in which to 'enquire around the world for these type of complex systems
that are one of a kind'.
He argued that:
We should go to a
contested definition study where we give each and every one of them $10
million, we write down the problems that need to be solved—we do not need to
specify anything; we just write down the problems—and we ask them to go away
for 12 to 24 months and come back with a specific statement of how they intend
to solve those problems, including the transfer of IP and data and so on, as
well as how they intend to deal with training and associated issues to secure
our sovereign capability. And we ask them what this is going to cost us. That
will allow us to compare apples with apples, which at the moment we cannot do.
Whomever we choose to move forward with will then be asked to move forward with
an Australian industry partner—which is likely to be the one who knows how to
build submarines in this domain. That is the logical way to do it.
Supporting Dr White's stance against sole-sourcing, Professor Roos
similarly warned about the risks of undertaking a limited tender. He was also
concerned about the lack of certainty with Japan's long term commitment:
If the Government
were to make it known that it was sole-sourcing a contract e.g. through
indicating a 'limited tender' which indicates a unilateral sole-source approach
to one submarine designer only, then it would place that Government in a
negotiating position where it would be difficult, if not impossible, to get a
good deal on both price and terms and conditions. This would de facto expose
Australia to an unacceptable level of risk in the national security domain; the
political domain; the operating domain; and as previously stated the commercial
domain. All this would also take place at an unusually early phase in what is a
complex evaluation and procurement process.
It will be impossible
if the best option was chosen unless at least one other option was pursued in
parallel—also as a back-up in case the Japanese option for some reason is taken
off the table by the Japanese themselves for political, performance, commercial
or national security reasons. This seems unacceptable given that the submarine
project is likely to be Australia's largest defence program for at least the
coming 40 years.
Commodore Paul Greenfield (Rtd) reinforced the view that a designer
should be selected through 'a due diligence process to ensure the right
decision is made'.
In his view, this process could be:
...through a funded
project definition study or a funded concept design. You could have a
competition if you wanted to, but the outcome must be acceptable in the
capability, technical and total cost sense, not just politically attractive.
Rear Admiral Briggs and Commodore Roach supported the view that
selecting the most appropriate design partner should be done by undertaking a
competitive PDS. They suggested that the study would provide costed, fixed
price bids for the design and construction of the submarines in Australia. As noted
earlier, most witnesses generally accepted that there were four valid starting
points—the French, Swedish, German or Japanese designs. Rear Admiral Briggs
strongly urged the government to conduct a competitive project definitions
study and to invite all four bidders to participate. They would be required to
meet the same criteria, including the date of completion; the required
performance; and the fact that 'you want them built in Australia'. He said:
The only way to pick
it is to conduct a competitive project definition study where you can get the
answers back to your top-level requirements and, frankly, these can go on two
sheets of paper. From that basis you have an informed point to be able to make
a decision on what is the starting point and who is going to come with you on
After which the government should make a sensible, informed choice and
then get on with the acquisition process because, in his words, the clock was
...we know the date; we
ought to go out with a competitive PDS which nominates the date and says, 'We
want your answers for a submarine in the water on that date'.
This approach would allow for the two year transition from the Collins:
that March gives two years of capacity that was found to be necessary for the
Rear Admiral Briggs reminded the committee about the importance of
acquiring the best possible submarine:
It is a fact that in
a submarine-on-submarine battle the difference is so fine; and it comes down to
the sonar superiority, the training superiority and the weapon. This is a knife
fight in a dark alley. If you make the first sweep and miss, you are going to
cop it right between the eyes. You have to get it right the first time.
Thus, he reasoned, the only way to ensure that Australia obtains this
cutting edge technology was through a competitive PDS. He stressed that 'You
will not get it unless you are forcing those four companies into a competition
where they have to stump up a promise and a real price'. Commodore Roach
endorse this view.
The committee is concerned that many assumptions have been made about
the various contenders for the future submarine but these assumptions remain
The committee has highlighted the vital importance of making the right
decisions at this critical stage of the project and before Defence takes
Australia down a path from which it cannot turn back.
The process of selecting the designer of Australia's future submarine—a
highly complex, expensive, safety-critical asset central to Defence's
capability—is far too important to opt for an inferior selection process.
The committee understands that a competitive process may require
additional time, but the committee is confident that such a process can be
achieved without a gap in capability for Australia's submarines.
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